June 18, 2012

Pricing Primer: Part 1

When I was a student at RISD, every now and then I would experience an overwhelming desire to take a math class up the hill at Brown. Immersed in theory, ambiguity, interpretation, symbolism and surrounded by disparate thoughts and ideas and arguments; I saw numbers as a breath of fresh, crisp, clear air. I felt like I needed to wrap my brain around something concrete, follow logical steps to solve a problem, and arrive at a definite answer.

I suppose it might help to know that I have always excelled in math at school. Which isn't to imply that it comes easily to me. It can be challenging, but it's a challenge I enjoy. As a kid, for fun, I did logic puzzles and took advanced math classes on weekends at Kid's College. Yep, I was a brainy nerd and proud of it. Now I do Sodoku puzzles when I need to let my mind rest and recharge.

With my love of numbers and passion for the logic of calculations, pricing my work should be a piece of cake. Naturally I have a color-coded spreadsheet that I use to determine the actual cost of the wares I produce. And a separate spreadsheet to calculate shipping costs. Rather than reinvent the wheel, I borrow from the many formulas out there for translating those costs into wholesale and retail prices (see the end of the post for examples).

And then something happens.

Goodnessgracioussakesalive, no one is going to spend $xx.xx for a [insert handmade item here]!

By which, of course, I mean I would never spend that much for such and such. I would just make it myself or do without. Yes, this is besides the point, but this immediate reaction of mine is a big psychological road block. Once I settle down I realize my balky reaction isn't even true. I do purchase handmade items and I gladly pay the asking price, a price at which I hope the maker is able to make a living. I would much rather pay a fair, high price for a well-crafted item that's built to last than pay little for shoddy workmanship.

So what's the problem?

Other than the psychological aspects of pricing which is an ongoing struggle, a big problem is the horrible underpricing of other makers. One of the numerous bits of advice about pricing is to look at what other people charge for items similar to your own and take their pricing into account when setting your own prices. Well, tool around Etsy and you will find handknit kitchen cloths (dishrags) priced lower than the cost of the yarn that went into making them. Forget about the multiple hours of knitting that each dish cloth requires. As a consumer, why would you purchase the fairly priced $50 dishcloth when you can get a similar one for less than $2? Oops, sorry, I didn't mean to stray back into psychology.

I find these first two formulas a bit oversimplified, but they do illustrate the variables in pricing.

Materials + Overhead + Labor + Profit = Price,

or another way to look at it,

Production Costs + Overhead Costs + Selling Costs + Profit = Price.

Another method is to calculate your actual cost per item, also known as your break even point. Double that figure to get your wholesale price (instead of adding "profit" into the initial formula), and double your wholesale price to get your retail price.

Now, this seems like it should be rather easy. Plug in some numbers, add, multiply, done. But as I started to write out all the costs that fall under the umbrella "overhead," I realized I don't have half of them in my own pricing spreadsheet. It's back to the drawing board for me. After I finish my homework, I'll address how to determine your per item break even point in Pricing Primer: Part 2.

In the meantime, do you have a pricing formula that works for you? As a buyer, what does price mean to you? Are you like me and generally assume low prices mean low quality (unless it's resale where it's a matter of pride and bragging rights to snag a well-made, quality brand for pennies)? Please share your thoughts in the comments section.